The finance ministry is set to tighten the tax slabs for individual taxpayers, and could retain or marginally lower the existing corporate tax rate in the new Direct Taxes Code.

Revenue compulsions and giveaways on the minimum alternate tax (MAT) have forced the government to revisit the tax rates proposed in the code. These include MAT and securities transaction tax (STT) rates, besides corporate and income-tax rates.

MAT is paid by companies that do not pay any income tax because of exemptions. A senior finance ministry official told ET that there would be a major revenue implication because of retaining book profits as the base for computing MAT and not gross assets. The tax base will shrink. So the tax rates will have to be reviewed, he said, seeking anonymity.

The government may tighten the tax slabs for personal income-tax payers, although the code had proposed widening the prevailing 10% rate to income of up to Rs 10 lakh. The code wanted a 20% tax for those earning Rs 10-25 lakh and 30% for income above Rs 25 lakh.

Currently, those with a taxable income between Rs 1,60,000 and Rs 5 lakh pay 10% tax while those in the Rs 5-8 lakh bracket pay 20%. A 30% income tax is charged for those with income above Rs 8 lakh.

However, the Central Board of Direct Taxes (CBDT) will not adopt these liberal slabs because it has not switched to a system of taxing savings schemes at maturity.

There is no way that the finance ministry can continue with the liberal tax rates and slabs proposed in the code as well the various incentives suggested in the revised paper. The government does have to collect revenue and so it will have to compromise on one of these, said Vikas Vasal, executive director, KPMG.

I would not be surprised if the proposed Rs 3-lakh deduction limit for savings is also reduced because of revenue considerations, said Shyamal Mukherjee, executive director of PricewaterhouseCoopers.

In corporate tax, CBDT will not have the leeway to lower the rate to 25% from 30% as proposed in the code. "A 5% rate cut was feasible with MAT on gross assets. Not any more, said the finance ministry official. He reckoned that the existing tax rates were moderate, although experts say India cannot be competitive vis--vis China with a 30% rate.

The finance ministry will also revise the STT rates that have been retained under the revised discussion paper. STT is not just a revenue-earning tool but a policy measure for controlling the market. The rate will be decided later, the official said.

The code had proposed scrapping STT. However, CBDT opted to retain it due to changes in the tax treatment of capital gains that would help investors in equities to lower their tax burden.